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Fed Reaffirms Three Rate Cuts This Year: 5 Technology Picks
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On Mar 20, after the FOMC meeting, the Fed kept the benchmark lending rate constant in the range of 5.25-5.5%. The range of the Fed fund rate has been steady since July 2023. Its current level marks the highest in 23 years. Since the beginning of 2024, market participants have been busy predicting when the central bank will cut interest rate first time.
Recently, a large section of financial researchers and economists were worried about the rate cut as the inflation rate remains sticky supported by a resilient labor market, increasing wage rate and strong consumer spending. However, in a relief to investors, the Fed reiterated the number of interest rate cuts that it had indicated in the December FOMC meeting.
Fed’s latest “dot-plot” (a closely watched matrix of anonymous projections from the 19 officials who comprise the FOMC) shows the benchmark lending rate to come down to 4.625% at mid-point by the end of 2024. The existing mid-point of the Fed fund rate is 5.375%. This indicates three rate cuts of 25 basis points each.
In his post-FOMC statement, Fed Chairman Jerome Powell said, “We believe that our policy rate is likely at its peak for this type of cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. We are prepared to maintain the current target range for the federal funds rate for longer if appropriate.”
Following the March FOMC decision, the CME FedWatch tool shows a 75% probability that the first rate cut will come in the June FOMC meeting. This probability was 60% just before Powell’s post-FOMC statement.
Consequently, Wall Street rallied to record highs. The broad-market index — the S&P 500 — closed at 5,224.62 after hitting an all-time high of 5,226.19. The benchmark closed above 5,200 for the first time. The blue-chip Dow recorded an all-time high of 39,529.13 and a closing high of 39,512.13. The tech-heavy Nasdaq Composite posted a new closing high of 16,369.41.
Growth Sectors to Benefit
Despite its higher valuation, the tech rally is likely to gather more pace in 2024 as a low market rate of interest always boosts growth stocks like technology. Investment in growth stocks creates wealth over a long period of time.
A lower market interest rate will decrease the discount rate, which in turn will raise the net present value of investment. Moreover, many of these companies depend on the chip source of credit for the business to grow.
The ongoing tech rally since the beginning of 2023 was led by a massive thrust toward artificial intelligence (AI), especially generative AI. The rapid penetration of digital technologies and the Internet worldwide during the lockdown period, ushered in significant adoption of AI.
We believe the AI space is yet to unfold in the United States and international markets. Once that happens, it will generate huge business opportunities for technology companies producing high-end products.
Our Top Picks
We have narrowed our search to five technology behemoths (market capital > $35 billion) that have provided double-digit returns year to date. These companies have robust business model, a solid financial position and globally acclaimed brand value.
These stocks have strong growth potential for 2024 and have seen positive earnings estimate revisions in the past 30 days. Finally, each of our picks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
NVIDIA Corp.’s (NVDA - Free Report) Compute & Networking revenues are gaining from the strong growth of AI, high-performance and accelerated computing. The data center end-market business is likely to benefit from the growing demand for generative AI and large language models using graphic processing units based on NVIDIA Hopper and Ampere architectures.
A surge in hyperscale demand and higher sell-ins to partners across the Gaming and ProViz end markets following the normalization of channel inventory are acting as tailwinds for NVDA. Collaborations with Mercedes-Benz and Audi are likely to advance NVDA’s presence in autonomous vehicles and other automotive electronics space.
NVIDIA has an expected revenue and earnings growth rate of 71% and 82.3%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past seven days. The stock price of NVDA has soared 82.5% year to date.
Meta Platforms Inc. (META - Free Report) is benefiting from steady user growth across all regions, particularly Asia Pacific. Increased engagement with its offerings like Instagram, WhatsApp, Messenger and Facebook has been a major growth driver. META is leveraging AI to recommend Reels content, which is driving traffic on Instagram and Facebook.
META’s innovative portfolio, which includes Threads, Reels, Llama 2 and Ray-Ban Meta smart glass, and mixed reality device Quest 3, is likely to aid growth. Reels continue to do very well across Instagram and Facebook. People reshared Reels 3.5 billion times every day during the fourth quarter.
Meta Platforms has an expected revenue and earnings growth rate of 17.7% and 34.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the past 30 days. The stock price of META has jumped 42.8% year to date.
Veeva Systems Inc.’s (VEEV - Free Report) continued focus on research and development and a strong product portfolio buoy optimism. VEEV has also been witnessing robust customer adoption of its products, which is encouraging.
VEEV has inked a few strategic alliances over the past few months. A strong liquidity position is an added plus. We expect total revenues and adjusted earnings per share are likely to witness a CAGR of 12.8% and 11.7% between fiscal 2023 and fiscal 2026, respectively.
Veeva Systems has an expected revenue and earnings growth rate of 15.8% and 25.6%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 9.9% over the past 30 days. The stock price of VEEV has climbed 19.6% year to date.
Synopsys Inc. (SNPS - Free Report) is benefiting from solid design wins due to a robust product portfolio. Growth in the hybrid working trend is driving demand for bandwidth. Strong traction for SNPS’ Fusion Compiler product is boosting its top line. The growing demand for advanced technology, design, IP and security solutions is also creating solid prospects for SNPS. Moreover, the rising impact of artificial intelligence, 5G, the Internet of Things and big data is driving investments in new computing and machine learning architectures.
Synopsys has an expected revenue and earnings growth rate of 13.2% and 21.2%, respectively, for the current year (ending October 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the past 30 days. The stock price of SNPS has advanced 14.6% year to date.
Cadence Design Systems Inc. (CDNS - Free Report) is gaining from robust customer demand. CDNS ended 2023 with a backlog of $6 billion and current remaining performance obligations of $3.2 billion. CDNS’ accelerated design activity owing to transformative generational trends such as generative AI, hyperscale computing, 5G and autonomous driving is likely to boost the top line.
Momentum in 3D-IC and chipset designs bodes well for CDNS. Expansion of its well-established partnerships with strategic partners like NVIDIA, Arm and Intel is a tailwind. Revenues for 2024 are now projected in the range of $4.55-$4.61 billion.
Cadence Design Systems has an expected revenue and earnings growth rate of 12.2% and 15.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1% over the past 30 days. The stock price of CDNS has appreciated 16.4% year to date.
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Fed Reaffirms Three Rate Cuts This Year: 5 Technology Picks
On Mar 20, after the FOMC meeting, the Fed kept the benchmark lending rate constant in the range of 5.25-5.5%. The range of the Fed fund rate has been steady since July 2023. Its current level marks the highest in 23 years. Since the beginning of 2024, market participants have been busy predicting when the central bank will cut interest rate first time.
Recently, a large section of financial researchers and economists were worried about the rate cut as the inflation rate remains sticky supported by a resilient labor market, increasing wage rate and strong consumer spending. However, in a relief to investors, the Fed reiterated the number of interest rate cuts that it had indicated in the December FOMC meeting.
Fed’s latest “dot-plot” (a closely watched matrix of anonymous projections from the 19 officials who comprise the FOMC) shows the benchmark lending rate to come down to 4.625% at mid-point by the end of 2024. The existing mid-point of the Fed fund rate is 5.375%. This indicates three rate cuts of 25 basis points each.
In his post-FOMC statement, Fed Chairman Jerome Powell said, “We believe that our policy rate is likely at its peak for this type of cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. We are prepared to maintain the current target range for the federal funds rate for longer if appropriate.”
Following the March FOMC decision, the CME FedWatch tool shows a 75% probability that the first rate cut will come in the June FOMC meeting. This probability was 60% just before Powell’s post-FOMC statement.
Consequently, Wall Street rallied to record highs. The broad-market index — the S&P 500 — closed at 5,224.62 after hitting an all-time high of 5,226.19. The benchmark closed above 5,200 for the first time. The blue-chip Dow recorded an all-time high of 39,529.13 and a closing high of 39,512.13. The tech-heavy Nasdaq Composite posted a new closing high of 16,369.41.
Growth Sectors to Benefit
Despite its higher valuation, the tech rally is likely to gather more pace in 2024 as a low market rate of interest always boosts growth stocks like technology. Investment in growth stocks creates wealth over a long period of time.
A lower market interest rate will decrease the discount rate, which in turn will raise the net present value of investment. Moreover, many of these companies depend on the chip source of credit for the business to grow.
The ongoing tech rally since the beginning of 2023 was led by a massive thrust toward artificial intelligence (AI), especially generative AI. The rapid penetration of digital technologies and the Internet worldwide during the lockdown period, ushered in significant adoption of AI.
We believe the AI space is yet to unfold in the United States and international markets. Once that happens, it will generate huge business opportunities for technology companies producing high-end products.
Our Top Picks
We have narrowed our search to five technology behemoths (market capital > $35 billion) that have provided double-digit returns year to date. These companies have robust business model, a solid financial position and globally acclaimed brand value.
These stocks have strong growth potential for 2024 and have seen positive earnings estimate revisions in the past 30 days. Finally, each of our picks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
NVIDIA Corp.’s (NVDA - Free Report) Compute & Networking revenues are gaining from the strong growth of AI, high-performance and accelerated computing. The data center end-market business is likely to benefit from the growing demand for generative AI and large language models using graphic processing units based on NVIDIA Hopper and Ampere architectures.
A surge in hyperscale demand and higher sell-ins to partners across the Gaming and ProViz end markets following the normalization of channel inventory are acting as tailwinds for NVDA. Collaborations with Mercedes-Benz and Audi are likely to advance NVDA’s presence in autonomous vehicles and other automotive electronics space.
NVIDIA has an expected revenue and earnings growth rate of 71% and 82.3%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past seven days. The stock price of NVDA has soared 82.5% year to date.
Meta Platforms Inc. (META - Free Report) is benefiting from steady user growth across all regions, particularly Asia Pacific. Increased engagement with its offerings like Instagram, WhatsApp, Messenger and Facebook has been a major growth driver. META is leveraging AI to recommend Reels content, which is driving traffic on Instagram and Facebook.
META’s innovative portfolio, which includes Threads, Reels, Llama 2 and Ray-Ban Meta smart glass, and mixed reality device Quest 3, is likely to aid growth. Reels continue to do very well across Instagram and Facebook. People reshared Reels 3.5 billion times every day during the fourth quarter.
Meta Platforms has an expected revenue and earnings growth rate of 17.7% and 34.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the past 30 days. The stock price of META has jumped 42.8% year to date.
Veeva Systems Inc.’s (VEEV - Free Report) continued focus on research and development and a strong product portfolio buoy optimism. VEEV has also been witnessing robust customer adoption of its products, which is encouraging.
VEEV has inked a few strategic alliances over the past few months. A strong liquidity position is an added plus. We expect total revenues and adjusted earnings per share are likely to witness a CAGR of 12.8% and 11.7% between fiscal 2023 and fiscal 2026, respectively.
Veeva Systems has an expected revenue and earnings growth rate of 15.8% and 25.6%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 9.9% over the past 30 days. The stock price of VEEV has climbed 19.6% year to date.
Synopsys Inc. (SNPS - Free Report) is benefiting from solid design wins due to a robust product portfolio. Growth in the hybrid working trend is driving demand for bandwidth. Strong traction for SNPS’ Fusion Compiler product is boosting its top line. The growing demand for advanced technology, design, IP and security solutions is also creating solid prospects for SNPS. Moreover, the rising impact of artificial intelligence, 5G, the Internet of Things and big data is driving investments in new computing and machine learning architectures.
Synopsys has an expected revenue and earnings growth rate of 13.2% and 21.2%, respectively, for the current year (ending October 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the past 30 days. The stock price of SNPS has advanced 14.6% year to date.
Cadence Design Systems Inc. (CDNS - Free Report) is gaining from robust customer demand. CDNS ended 2023 with a backlog of $6 billion and current remaining performance obligations of $3.2 billion. CDNS’ accelerated design activity owing to transformative generational trends such as generative AI, hyperscale computing, 5G and autonomous driving is likely to boost the top line.
Momentum in 3D-IC and chipset designs bodes well for CDNS. Expansion of its well-established partnerships with strategic partners like NVIDIA, Arm and Intel is a tailwind. Revenues for 2024 are now projected in the range of $4.55-$4.61 billion.
Cadence Design Systems has an expected revenue and earnings growth rate of 12.2% and 15.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1% over the past 30 days. The stock price of CDNS has appreciated 16.4% year to date.